As a 58-year-old woman who needs to save for retirement, what is the best way to save?
I am 58 years old and I have a wonderful job that is paying six figures. My employer contributes 25 percent of my salary and bonus each year into an account (not a fund of any kind) for me. I already have a traditional IRA that I used to roll my 401(k) over to. I also have a Roth IRA that has a very small amount that I am not doing anything with. I will be retiring within 10 years and the 25 percent retirement account will not be enough to retire on so I feel like I need to do something else. Should I take some of my paycheck and contribute to my Roth IRA?
Congratulations on a well-paying position that you are excited about. Saving into a Roth IRA or (Roth 401k) is a great tool, but other factors may be more impactful to your retirement goal.
First check to make sure you don’t hit the income phase out limits for a Roth IRA. ($120,000 for single and $189,000 for married filing jointly.) If you are eligible you can do $5,500 plus an additional $1,000 for 2018 because you are 50 or older.
The 25% of salary and bonus that your employer contributes is a very nice benefit, but there are some important questions that you need to ask or potentially work with someone to double check and align with your goals. What will the short and long-term tax implications be of this account? How is it invested? What is the current value of the account? In ten years at $25,000 a year, at a 5% return you would have over $314,000 more in that account. But this is only one example. Your account may be much higher or lower in its return and risk.
Is the 401k that you rolled into an IRA from a previous employer? If your current employer has a 401K plan, it may have a Roth option that is not subject to income limits. For you $24,500 a year in Roth 401K savings. ($18,500 plus $6,000 because you are 50 or older.)
A tax analysis may guide you to the best way to save for your retirement. Think of three investment pools. (There are more complicated planning that I am not covering here.)
- Tax Deferred (IRA or 401K). Reduces your current taxable income and thus lower your current taxes but are fully taxed as ordinary income on qualified withdrawals.
- Tax Exempt (Roth IRA and 401K). Does not reduce your current income or lower current taxes, but you never pay taxes on qualified withdrawals.
- Taxable Account. No limits to savings. Taxes on interest and realized gains.
Aligning these savings types with your retirement incomes such as social security and things like pensions can increase your after-tax income from the same amount of savings.
Compare current versus future tax rates for example. If you save 25% taxes now from IRA/401k savings to pay 35% in the future, then you may be tax inefficient. There are lots of variables (and rules) that warrant working with a planner that does this as part of their practice and that works with your tax professional.
Happy to help with any further questions or clarifications!
Thank you for the question and congratulations on having such a positive view of your job and an employer that contributes to your retirement.
While contributing to your Roth IRA is an appropriate course of action, it is hard for me to know from the facts you presented whether or not you are eligible to contribute. While your question makes it sound as if you are unmarried, I am not sure if that is the case. I also do not know from your question what your current income level is. The IRS imposes limitations on how much money you can make and still contribute to either a traditional IRA or a Roth IRA. In 2018, for single taxpayers, the phase-out of eligibility starts at $120,000; it is eliminated at $135,000. For those filing joint returns, the phase-out starts at $189,000; it is eliminated at $199,000. Since you are over 50, your maximum annual contribution is $6,500.
I would also recommend looking into the type of account your employer is using for the 25% of your salary and bonus, so that you can determine if it should be rolled over into another account that would allow you to diversify your holdings appropriately among equities, cash, and fixed-income.
You might also want to engage a fee-only advisor to help you understand how retirement ready you are as well as whether or not you are on track to have the lifestyle you want when you are ready to retire.
Beyond traditional IRA and Roth contributions, you could also open a taxable investment account to allow you to save more money for retirement. You can also use the ssa.gov website to gain a better understanding of how much social security you may be eligible to receive. Social security is another form of income that can help fund your retirement. Ideally, if your health is good, you can consider waiting until 70 to start collecting social security payments, as that will allow you to maximize your benefit.
If you are not comfortable determining the best approach, or want some guidance, consider engaging a financial advisor who can give you a better understanding of where you stand and make some recommendations as to the best way to live the life you want when you retire.
I hope this helps. Feel free to reach out with further questions.
Yes, you will want to contribute the maximum you can to the Roth IRA, which is $6,500 in 2018 since you get access to the $1,000 catch-up contribution for being over age 50.
You should also investigate the account your employer is contributing money into to determine if the money can be invested. You might be surprised that the plan documents allow you to invest this money, even if it doesn't seem so when you first look at the plan. For example, you might be eligible for an in-service rollover to your traditional IRA, which would allow you to invest the funds in an appropriate mix of equities, bonds, and other investments. If the plan documents are difficult to understand, a fee-only and fiduciary adviser can give you good advice on the plan and what you can do with it.
You may also want to hire a financial adviser to do a calculation of your retirement readiness; including projections for your Social Security benefits and the income you can expect from the current employer's account, the traditional IRA, and the Roth IRA. We do a retirement readiness report for $500, and I'm sure other planners can help you with this as well.
Finally, you most likely would benefit from establishing a plan to allow you to retire at 68, when you want to, without taking Social Security until age 70. If a plan can be established to do this, your Social Security benefit will be significantly increased, which will relieve some of the pressure on your retirement savings.
The types of accounts or receptacles you place your savings in are important, but much more important is the investment strategy you employ. You have provided a few tidbits of information but without knowing more details - amounts accumulated already inside your IRAs, the amount & type of "account" you employer is placing money into, your spending habits & wishes in retirement etc.. - I cannot begin to give you sage advice. I can tell you by what you have stated that you need to save as quickly and aggressively as possible. If you have a 401k you can contribute to, that is usually the first choice. If not, after you max out your Roth assuming you are not phased out due to your income, save in a taxable investment account. Then you need a sound investment strategy with some type of sell discipline because this near retirement you cannot afford to give back large chunks of principal during the next bear market. Many advisors will try to sell you an "indexed" annuity, and while this will protect the downside, it will not provide enough upside during good markets. And pardon me if I am wrong, but it also appears by your comments that you do not have a whole lot of investing experience. I would seek out and interview fee based only investment advisors who act as your Fiduciary and are free of conflict of interest.
I hope this helps and stimulates your thinking, but without a better picture of your situation I have more questions than answers.
Best of luck, Dan Stewart CFA®
You should at the very least max out a ROTH IRA. And go beyond that amount savings wise.
Strive to save 10-20% of your salary. Consider talking to a fee only fiduciary financial planner to see what you actually needs to save to retire comfortably in 10 years. The peace of mind alone will make the cost worth.